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John Harvard's Journal

Money-Manager Transition

March-April 2005

The University announced on January 11 that Jack R. Meyer, M.B.A. '69, president and chief executive officer of Harvard Management Company (HMC), would "conclude his service" sometime after the close of the fiscal year in June. Meyer has been at HMC's helm since 1990. The endowment was then valued at approximately $4.8 billion; it reached a record $22.6 billion as of June 30, 2004, after that fiscal year's distribution of $897 million to support Harvard operations and Allston campus development (more than triple the $258 million in capital gifts received during the same period). Following the course of several other HMC investment professionals who have compiled superior performance records in recent years and then left to establish private money-management enterprises -- typically with a contract to continue managing funds for Harvard -- Meyer and four colleagues will launch their own firm after departing later this year.

Jack R. Meyer
Richard Howard / Harvard News Office

That significant news overshadowed, and in part subsumed, the Thanksgiving-week announcement on HMC portfolio managers' compensation for fiscal year 2004 (see "Compensation Controversy, Continued"). After compensation for fiscal year 2005 is reported, the issue will be moot so far as top-ranking portfolio managers David R. Mittelman and Maurice Samuels are concerned. They, Edward DeNoble (emerging-markets bond manager), and Michael Pradko (HMC's chief risk officer) are the senior personnel leaving with Meyer.

In an interview on the day the departures were announced, Meyer cited three reasons. First, he said, "It's time for a new chapter for me," after 15 years at HMC (he was previously chief investment officer of the Rockefeller Foundation and deputy controller of New York City). Second, he said, the possibility of creating a new firm with admired colleagues was "very exciting." And finally, he said, "I would like to drop out of the public spotlight a bit." At Harvard, he said, HMC's performance is subject to "close scrutiny of returns, to the last basis point," and there is the "annual compensation thorn" prompted by disclosure of the top portfolio managers' pay -- and his own ($7.2 million in fiscal year 2004).

University Treasurer James F. Rothenberg, chair of HMC's board, began an interview by noting that Meyer and colleagues would be present through the end of this fiscal year, focused on maximizing returns for Harvard. "I thank him and all his associates for the tremendous job they have done for 15 years plus," Rothenberg said. HMC's diversified investment system and the structure of compensation, both created under Meyer, "produced an extraordinary result for the University."

Accordingly, Rothenberg identified the twin tasks of a steering committee he will direct as identifying Meyer's successor and ensuring a smooth transition at HMC. The news release concerning the events said the steering committee would "consider more generally how best to ensure HMC's future organizational strength and sound investment results." Separately, President Lawrence H. Summers said, "We will make whatever arrangements are necessary to best assure strong endowment performance" for the benefit of Harvard's students, faculty, and community.

The need to secure the latter is obvious. In his release on fiscal year 2004 compensation, Meyer noted that the portfolios of the managers most highly paid in that year -- domestic bonds, foreign bonds, foreign equity, domestic equity -- had exceeded market returns for those asset classes by $2.8 billion during the five years from 2000 through 2004.

The larger structural question -- how best to sustain superior performance -- is more vexing. Rothenberg indicated that Meyer's departure did not, by itself, mean that the HMC model of a stand-alone investment-management enterprise within the University had run its course. In recent years, he noted, the share of Harvard assets managed within HMC had declined from about 85 percent to about half the total -- reflecting the earlier departures of other HMC personnel and agreements to hire their new firms to manage some Harvard funds externally. Rothenberg noted that there was an "evolution going on" in how HMC works. Although he would "never say it is not a possibility" that Harvard would move away from operating HMC, many skilled money managers are on the staff. How the evolution unfolds, he said, depends on the talents of the new leadership and that new person's ability to hire the right fund managers, internal or external.

HMC's staff, Meyer indicated separately, numbers 175, including 30 or so portfolio managers (he declined to quantify aggregate expenses or fees paid to external managers). This substantial roster includes money managers, traders, analysts, and accounting and support personnel. Some are required no matter where funds are invested; others manage money internally.

Might Meyer and his associates continue to invest for Harvard once they leave HMC -- retaining expertise that has performed superbly, but further reducing the internal asset base? That "hasn't been decided yet," Rothenberg said, but "the possibility exists."

As he considers those issues, Rothenberg will have deep financial expertise to draw on, beyond his own experience at Capital Research and Management Company, where he is president. Other steering committee members include Summers and Corporation member Robert E. Rubin (now at Citigroup), both former U.S. Treasury secretaries; vice president for finance Ann E. Berman; vice president and general counsel Robert Iuliano; Peter A. Nadosy '68, former president of Morgan Stanley Asset Management; Steven M. Heller '76, J.D. '80, who has coheaded the investment-banking and merger businesses at Goldman Sachs; and corporate attorney Lewis B. Kaden '63, LL.B. '67, of Davis Polk & Wardwell. The steering committee welcomes comments and suggestions at [email protected].